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EME earnings call for the period ending September 30, 2018

Contents:

Prepared Remarks

Questions and Answers

Call Participants

Prepared Remarks:

Operator

Good morning. My name is Maisha and I will be your conference operator for today. At this time, I would like to welcome everyone to the EMCOR Group, Third Quarter 2018 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session (Operator Instruction).

Thank you, Maisha, and good morning everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the company's 2018 third quarter results, which were reported earlier this morning.

I would like to turn the call over to Kevin Matz, Executive Vice President of Shared Services, who will introduce management. Kevin, please go ahead.

R. Kevin Matz -- Executive Vice President, Shared Services

Thank you, Jamie, and good morning everyone. Welcome to EMCOR's earnings conference call for the third quarter of 2002. For those of you who are accessing our call via the internet on our website, welcome to you as well, and we hope you have arrived at the beginning of our slide presentation that will accompany our remarks today.

Please advance to slide two. This presentation and discussion contains certain forward-looking statements and certain non-GAAP financial information. Page two describes in detail the forward-looking statements and the non-GAAP financial information disclosures. I encourage everyone to review both statements in conjunction with our discussion, and the accompanying slides.

Slide 3 has the executives who are with me to discuss the quarter and nine months results. They are Tony Guzzi, our Chairman, President and CEO; Mark Pompa, our Executive VP and Chief Financial Officer; Maxine Mauricio, our Senior Vice President and General Counsel; and our Vice President of Marketing and Communications, Mava Heffler. For call participants not accessing the conference call via the Internet, this presentation, including the slides will be archived in the Investor Relations section of our website under Presentations. You can find this at emcorgroup.com.

With that said, please let me turn the call over to Tony. Tony?

Anthony J. Guzzi -- Chairman, President and Chief Executive Officer

Thanks, Kevin and good morning. And I'll be covering pages four to six upfront here. We had another terrific quarter. We set quarterly records for revenue, operating income, net income and diluted earnings per share from continuing operations. We had 7.5% organic growth -- revenue growth in the quarter, which was aided not only by the recovery in our Industrial Services segment for the Harvey impact in the year ago period, but also strong organic growth in our Building Services, Electrical Construction and UK segments. We are winning new work and executing that new work well across all segments.

We continue to perform well in our Mechanical and Electrical Construction segments, our Building Services segment and the UK. We are now finally experiencing a recovery that is still gaining momentum in our Industrial Services segment, as more normal demand patterns and activity return with our refining and petrochemical customers post-Harvey. We continue to attract some of the best skilled trades people. However, labor markets are tight and we will drive productivity solutions to reduce our field labor needs, and we always are recruiting and training new entrants into our skilled trades workforce.

Overall, we had a really good quarter and we have very good performance year-to-date. In our Mechanical and Electrical Construction segments, we continue to perform well. On a combined basis, we performed at 7.4% operating income margins, and as I've said many, many, many times, you cannot look at operating income margins in these segments on a quarter-to-quarter basis. But to understand the trends, it is better to look at a four to five quarter rolling average, and when viewed in the current quarter or through that lens, of this rolling average, our operating income margins are strong and we are executing well. Most of the quarter-to-quarter fluctuations result from project mix, timing and in some cases dispute resolutions or problem jobs.

However, over a few quarters that normalizes and we know that our performance is strong and we're executing with discipline and focus. We have strong results across almost all market sectors, and geographies. We are winning work at acceptable margins and our subsidiary and segment leaders are focused on delivering for our customers on some of the most mission critical and demanding projects. We are proud of our record in delivering superior results for our customers in these segments.

Our Building Services segment had very strong organic growth in the quarter, 6.4% driven by our Mechanical and Energy Services business. We also had very strong operating income margins of 6.2%, which is a result of both revenue mix and strong execution. We're implementing our new contract wins well in the commercial site based business and have strong execution in our government business, especially in our IDIQ work. Our team in Building Services is focused like a laser on improving our customers' maintenance and energy spend through project and recurring maintenance solutions that drive better asset efficiency and utilization for their customers across commercial, industrial, manufacturing, healthcare, institutional, government market sectors. We had a good quarter. We have good discipline, strong execution and we think that will continue.

Our Industrial Services segment is contributing again. The comparison versus the year ago period is not that difficult as Harvey decimated this segment in the third and fourth quarters of 2017. Also it's important to realize that third quarter is not one of our seasonally strongest quarters. We are back to serving our customers in a substantial manner. We are not satisfied with 3.8% operating margins. Our operating income margins will improve in the fourth quarter as customers spending patterns continue to improve in the fourth quarter. And they have to-date in the fourth quarter.

Our team has made many improvements over the last year, in both our shop and field businesses that have not yet materialized in our results. We took advantage of the weak market to hire some great people and invest in some infrastructure for a recovering market. Shop performance is better, we have more work, at better margins in our remaining performance obligations and as a result, we expect our shop performance to improve.

Our UK segment continues to perform well. We continue to win new customers and expand existing relationships and with 17.1% organic revenue growth in the quarter and improved operating income margins versus the year ago period, the results show the success. We are performing well, in both our facilities management, technical services and small project businesses in the UK. Despite strong organic revenue growth in the quarter, we had strong growth in our remaining performance obligations, up 8% on a sequential basis and are at 3.97 billion.

We believe this growth in our RPOs bodes well for our future performance. We had good cash flow in the quarter, despite the strong organic revenue growth, and we expect cash flow to continue to improve in the fourth quarter as is typical for us. And we will expect a decent cash flow year this year, but maybe not quite as strong as last year. Our balance sheet is strong, and it gives us the flexibility to invest in and grow our business. And with that, Mark, I'll turn it over to you.

Mark A. Pompa -- Executive Vice President and Chief Financial Officer

Thank you, Tony, and good morning to everyone participating on the call today. For those accessing this presentation via the webcast, we are now on slide 7. Over the next several slides, I will augment Tony's opening commentary on EMCOR's third quarter performance as well as provide a summary of our year-to-date results through September 30. All financial information referenced is derived from our consolidated financial statements, included in both our earnings release announcement and Form 10-Q filed with the Securities and Exchange Commission earlier this morning.

So let's revisit our third quarter performance. Consolidated revenues of $2.05 billion are up 8.5% over quarter 3, 2017. Our third quarter results include $19.3 million of revenues attributable to businesses acquired, pertaining to the period of time that such businesses were not owned by EMCOR in last year's third quarter. Acquisition revenues positively impacted our US Mechanical Construction and US Building Services segments. Excluding the impact of businesses acquired, third quarter consolidated revenues increased a $141 million or 7.5% organically.

All of EMCOR's reportable segments generated revenue growth during the third quarter. US Electricals Construction revenues of $486 million increased $28.1 million or 6.1% from quarter 3, 2017. Quarter-over-quarter revenue gains within the commercial, hospitality and manufacturing market sectors were partially offset by revenue declines within the transportation and institutional market sectors, due to the completion or substantial completion of several large infrastructure projects during 2017.

US Mechanical Construction revenues of $772.3 million increased $12.2 million or 1.6%. Excluding acquisitions revenues of $10.7 million, this segment's revenues increased $1.5 million or 0.2% organically. As I mentioned during my second quarter earnings call commentary, our Mechanical Construction segment completed a number of large scale projects in 2017. As a result, and as we began pre-project planning and mobilization on a number of new projects within the segment, we only achieved modest revenue growth during the quarter just ended. This segment has however experienced the largest increase in new contract awards as evidenced by the 18% growth and remaining performance obligations since March 31 of this year.

EMCOR 's total domestic construction business third quarter revenues of $1.26 billion increased to $40.3 million or 3.3%. US Building Services quarterly revenue of $473.7 million increased $36.6 million or 8.4%. Excluding acquisition revenues of $8.6 million this segment's revenues increased organically 6.4%. Revenue gains within the Mechanical, Energy and Government Services divisions were partially offset by a revenue decline within their commercial site based services division. This segment continues to experience strong project demand, which is providing a more favorable revenue mix. US Industrial Services revenues of $214.5 million increased $68.8 million or 47.2% as a result of higher field services and shop services activities.

As I'm sure everyone on this call remembers, and as Tony just commented, 2017 third quarter results for this segment were severely impacted by Hurricane Harvey. Towards the latter half of quarter three of this year, we started to see the resumption of normal seasonal demand as we head into the fall turnaround season. We are encouraged to be able to provide quality services to our customers as they move beyond the scheduled disruptions caused last year and earlier this year by Hurricane Harvey. The United Kingdom building services revenues of $100.5 million increased $14.7 million or 17.1% as a result of increased small and capital project activities. This segment's quarterly revenues were negatively impacted by $400,000 of foreign currency movement as the Pound Sterling continues its vulnerability due to uncertainties around the terms of the U.K's exit from the European Union. My last statement on third quarter revenues is to echo what Tony referenced earlier, our $2.05 billion quarterly revenues is a new record for EMCOR and eclipse 2017, fourth quarter, which represented the first time we exceeded $2 billion of quarterly revenues in our history.

Please turn to slide 8. Selling, general and administrative expenses of $197.3 million represent 9.6% of third quarter revenues and reflecting an increase of $8.4 million from quarter three 2017, the current year's quarter includes approximately $2.8 million incremental SG&A inclusive of intangible asset amortization from businesses acquired resulting in an organic quarter-over-quarter increase of approximately $5.6 million.

This organic increase is primarily due to higher incentive compensation costs necessitated by our expectations for increased year-over-year profitability as well as other employment costs associated with an increase in employee headcount to support organic revenue growth. Additionally, we have experienced increases in information technology and professional fee expenses quarter-over-quarter due to discrete initiatives currently in progress. Reported operating income from the quarter of $111.8 million represents 5.5% of revenues. In compares of $106 million or 5.6% of revenues in 2017 third quarter similar to this quarter's revenue performance are almost $112 million of quarterly operating income represents a new all-time quarterly record.

With that said, I will now cover each of our reporting segments quarterly operating income and operating margin performance, our US a logical Construction Services segment operating income of $34.5 million, decreased to $12.1 million from the comparable 2017 period reported quarterly operating margin is 7.1% which is below 2017 exceptional third quarter operating margin of 10.2%. This segment executed a number of large transportation and telecommunications projects and last year's third quarter than either completed or reach the substantial completion resulting in the record quarterly operating income margin in 2017.

Conversely, the current year's quarter results include a large number of new projects which are in the early stages of completion. In addition, this segment's results were negatively impacted by an infrastructure project on the West Coast, which experienced a write down of $4.7 million due to contract scope issues. 2018 to the third quarter U.S mechanical Construction Services segment operating income of $58.7 million represents a $1.2 million or 2.1% increase from last year quarter. Operating margin of 7.6% It's consistent period over period. The increase in the operating income is due to increased gross profit from manufacturing commercial and hospitality project activity as well as the contribution from the business acquired in 2017.

Our total U.S construction businesses is reporting a 7.4% operating margin for the quarter just ended, as compared to 8.5% on last year's third quarter operating income for US building services increased $3.3 million to $29.3 million or 6.2% of revenues. The improvement in quarterly operating income and operating margin is primarily due to increased profitability within their government services division due to new contract awards and increased IDIQ projects activity. Additionally, this segment's operating income benefited from an increase in large project activity period over period, within its Energy Services division.

Our US Industrial Services segment operating income of $8.2 million represents 3.8% of revenues which is an increase of $13 million from 2017 quarterly operating loss of $4.8 million above the third quarter of each year tends to be one of the seasonally weakest for this segment It is encouraging to see a return to more typical levels of activity within both our field services and shop activities as we gear up for the fall turn around season.

UK building services operating income of $4.5 million or 4.4% of revenues, represents an increase of $1 million and is a 40 basis point improvement over last year's third quarter. Continued strong small and capital project activity, drove the period over period improvement.

We are now on slide 9 additional key financial data for the third quarter not addressed on the previous slide are as follows: quarter three Gross profit of $309.3 million or 15.1% of revenues is improved in absolute dollars by $14.3 million however, our gross profit margin contracted 50 basis points due to the reduction in US electrical construction gross profit as a result of the change in revenue mix as well as the gross profit and gross margin impact of the last project previously referenced.

Diluted earnings per common share from continuing operations is $1.36 in comparison to $1.09 for the quarter ended September 30, 2017. This represents a $0.27 or 24.8% improvement quarter-over-quarter, our tax rate for the third quarter is 27.1% and was favorably impacted by certain discrete items with one quarter remaining in 2018 and our year-to-date tax rate being consistent with the quarterly rate of 27.1% just reported I believe our full year 2018 tax rate will now be between 27% and 27.5%.

We have continued our quarterly sequential improvement in cash flow performance with third quarter cash provided by operating activities representing $98.5 million. As a result of our significant organic revenue growth during the quarter, our working capital investment has increased, driven primarily by new construction project start-ups and a rebound in Industrial Services activities. At this time last year, we had very little revenue activities within our Industrial Services segment due to Hurricane Harvey's impact, and as previously stated, we have numerous projects within our two US construction segments finish or achieve significant completion milestones that triggered substantial cash collections in late 2017.

As Tony indicated earlier, we are still anticipating strong cash generation during the fourth quarter, but do not expect to achieve a result comparable to 2017's record cash flow generation.

We are now on slide 10. With the quarter out of the way, let's now turn our attention to our year-to-date results through September 30. Revenues of $5.9 billion, represent an increase of $227 million or 4% as compared to $5.67 billion in the prior year period. Our year-to-date results include $55.3 million of revenues attributable to businesses acquired pertaining to the period of time that such businesses were not owned by EMCOR in the 2017 year-to-date period. Excluding the impact of businesses acquired, year-to-date revenues increased organically $171.7 million or 3%.

Significant revenue growth within each of our domestic construction segments and our US and UK building services segments was muted by a 4.2% year-over-year revenue decline in our Industrial Services segment, which got off to a slow start in 2018, due to the carryover impact of Hurricane Harvey. Year-to-date gross profit of $869.3 million is greater than the respective 2017 period by $33.4 million or 4%. 2018's gross margin is 14.7% -- I'm sorry, 2018's gross margin of 14.7% is flat with the comparative 2017 period. Strong year-over-year improvement within each of our US Mechanical Construction, US Building and UK Building Services segments, in both absolute dollars and margin contribution percentages was partially offset by reductions within both our US Electrical Construction and US Industrial Services segments.

Selling, general and administrative expenses of $578.3 million, represent 9.8% of revenues as compared to $554.1 million or 9.8% of revenues in 2017. Year-to-date 2018 includes $7.6 million of incremental SG&A, inclusive of intangible asset amortization pertaining to businesses acquired. Year-to-date operating income was $289.4 million and represents an $8.6 million increase over 2017's year-to-date performance. Our year-to-date operating margin is 4.9%, which is consistent with 2017's nine month performance. Although our operating margin was flat year-over-year, as we disclosed last year, 2017's nine month-to-date operating margin benefited by 30 basis points due to the recovery of certain contract cost previously distributed on a project within our US Mechanical Construction segment completed in 2016.

Additionally, the project writedown during the current quarter within our US Electrical Construction segment negatively impacted our year-to-date operating margin by 10 basis points. Reported diluted earnings per common share from continuing operations was $3.52 for the nine months ended September 30, 2018, compared to $2.93 in the corresponding nine months 2017 period. On an adjusted basis reflecting the add-back of a non-cash intangible asset impairment loss realized in 2018 second quarter, non-GAAP diluted earnings per share from continuing operations would have been $3.54 as compared to 2017's $2.93, which represents an improvement of 20.8% year-over-year.

We are now on slide 11. EMCOR's balance sheet continues to maintain its strength. Variations of note from December 31, 2017 are as follows: Our September 30 cash balances decreased from the year-end 2017, primarily as a result of the continued repurchase of common stock pursuant to our stock repurchase program, as well as funding for acquisitions, capital expenditures and dividends. Working capital levels have increased due to a growth in accounts receivable on contract assets, related to our strong quarterly organic revenue performance. Changes in our goodwill balance reflect the impact of businesses acquired. Identifiable intangible assets have primarily decreased due to the impact of $31.5 million of year-to-date amortization expense and the approximately $900,000 trade name impairment loss taken in the second quarter.

Total debt of $299.3 million is reduced from December 31, 2017 due to mandatory quarterly principal repayments under our outstanding term loan, partially offset by the amortization of debt issuance costs during the 2018 year-to-date period. As a result of our outstanding borrowings, we have a debt-to-capitalization ratio of 14.4% at September 30, 2018. Although our cash flow performance to-date does not favorably compare to our exceptional 2017 performance, our balance sheet retains its strength and we remain in good position to execute against our strategic objectives and to capitalize on market opportunities.

With my portion on the formal slide presentation concluded, I will return the call to Tony. Tony?

Anthony J. Guzzi -- Chairman, President and Chief Executive Officer

Thanks, Mark, and I'm on page 12, it's remaining performance obligations or RPO by segment and market sector. As we have communicated over the last several quarters, at the beginning of 2018, EMCOR adopted FASB's new revenue recognition standard, which requires a disclosure of remaining unsatisfied performance obligations. We call those RPOs. Prior to the adoption of new standard, the company had reported backlog on a quarterly basis. Backlog is not a term recognized under United States generally accepted accounting principles.

So instead of reporting two figures, we have chosen to move solely to RPO. The most significant difference between remaining performance obligations and backlog relates to the contract term of the company's service contracts. A detailed description of that difference between backlog and RPO can be found in the MD&A within the company's first quarter 10-Q.

Looking at the graphs, total RPOs at the end of the third quarter was $3.97 billion, or up 8.1% from the June 30 level of $3.67 billion or up $365 million or 10.1% from March 31, 2018 when we initially changed over to RPO reporting from backlog. RPO increase this year have mainly been driven by our domestic construction segments. However, our other two domestic segments, Building Services and Industrial Services have also experienced RPO growth for the year. RPO in our UK segment is down a bit, thus far this year.

Looking at RPO by market sector, our growth is being led by increases in commercial and industrial sector projects. We like that, where we have leading positions, for instance in data center and food processing projects. We believe that total non-residential activity remains buoyant, and around the mid-single digit growth for the year and as we move into the final quarter of 2018, there is nothing that we currently see that will blunt the activity as we move into the beginning of 2019. We're in pretty good market yet.

So in summary, we have grown our RPO level through the year on a back of a good non-residential market and the current bidding environment is active, and we are positioned to continue to execute well in what is still a pretty good market.

Now go to pages 13 and 14, as we move to year-end, we are going to raise our guidance from $4.40 to $4.80 per diluted share from continuing operations to $4.75 to $4.90 per diluted share from continuing operations. We now expect revenues to be at least $7.9 billion. We expect each of our segments to perform well in the fourth quarter. And the difference between the bottom end of the range, that's the $4.75, and the top end of our range, which is the $4.90 will result from continued strong execution and performance at our Mechanical and Electrical Construction segments, and if work accelerates to year-end like it did last year that will help us get to the top end of the range.

We do expect continued improvement in our Industrial Services segment, but with the scope increases, we could move to the top end of the range. And we do expect solid execution in the UK in Building Services segment. It is a narrow range at this point in the year. So those items, project timing and acceleration, scope increases in industrial and growth in maintenance project work in building service in UK will define where we are in that range.

Now let's get to capital allocation. We will continue to allocate capital to growth first, and you saw that in the third quarter where we had strong organic revenue growth. And we now have executed two nice acquisitions, one tucks into our Electrical Construction segment and the other one, earlier in the year tucked into our Building Services segment. And these deals open new geographies to us and also bring us some new capabilities to execute for our customers. We have a robust pipeline for these deals at this time and we are known as a destination of choice for people and their companies that want a long-term home for their life's work.

We have repurchased 96 million in shares through the third quarter and have returned another $14 million in cash to shareholders through dividends, year-to-date. Our Board authorized us at our meeting, just a day ago to repurchase another $200 million of shares when coupled with our remaining share authorization of $79 million provided adequate authorization to execute additional return of cash to shareholders. We believe our markets continue to provide us opportunity to perform for you and we look forward to finishing 2018 strong.

And with that, Maisha, I will take questions.

Questions and Answers:

Operator

(Operator Instructions) And at this time, your first question does come from Tahira, Tahira, your line is open.

Tahira Afzal -- KeyBanc Capital Markets -- Analyst

Hi, thank you and congratulations on another strong quarter, guys.

Anthony J. Guzzi -- Chairman, President and Chief Executive Officer

Thanks T.

Tahira Afzal -- KeyBanc Capital Markets -- Analyst

Tony, given the strength of the third quarter, and then I don't know you might have low vol fourth quarter again on the revenue side. But just given your commentary, Mechanical seems like you are getting a lot of backlog and again Industrial is recovering. Is it conceivable potentially for you guys to see mid to high single-digit revenue growth into next year?

Anthony J. Guzzi -- Chairman, President and Chief Executive Officer

I think a lot of that will depend on where we end the year, T. We had a lot of project accelerations at the end of last year. That could happen again this year. We're not going to comment on '19, but we think that mid-single digit growth in the non-res market would bode well for us. We've got to understand more about the turnaround schedule, which right now looks pretty good, and then all the things going around the restructure, but right now with remaining performance obligations of 8.1% sequentially we continue to see strength in that going into fourth quarter, I expect us to have decent guidance going into next year.

Tahira Afzal -- KeyBanc Capital Markets -- Analyst

Got it, OK. And just taking the commentary you had on really making the industrial margins, really pushing those further and you're not happy with where they are right now. And then hopefully these glitches in transportation projects go away, could you also see margin expansion next year?

Anthony J. Guzzi -- Chairman, President and Chief Executive Officer

I think a lot of it will have to do with mix, T. Clearly, our Industrial Services people expect better margins and to do better. It's naive, we need more volume and we're starting to see volume return. We did make some nice investments in that business. So we'll have some start-up as we start up a couple new areas -- product lines, both at mid-stream and also some other services in the refinery. But we do expect to do better in Industrial.

Now we also have very strong Construction margins right now. And we're going to fight like heck to keep them, but in some ways in Construction, we like our margins where they are and somewhere around there is OK. We need to grow margin dollars there as the work's available and the right mix of work's available. And Building Services, we continue to get sort of right mix. We don't see any slowing in the kind of work we're doing there to help our customers improve their assets, and the UK continues to be for sure, strong. But I always think about it, we're around 5% right now. The mix of how we get to that 5% or high-4%s to mid-5%s may change. But that's a pretty good place for us to be. We'd like some margin expansion. But we don't want to sacrifice that next project for margin expansion. Mark, I mean you may have a view on that too?

Mark A. Pompa -- Executive Vice President and Chief Financial Officer

Yes, I think, with regard to Tony's comment on Industrial, obviously, there is still some headwind within the third quarter and their margin performance is because of their higher fixed overhead structure. And they did ramp-up activity, but the activity ramped up for us in the latter half of quarter three. So there definitely was some under absorption of overhead. The company is performing well across the whole portfolio as we speak. As you could appreciate there is a tremendous amount of moving parts. We're remaining disciplined in our project selection and obviously we're requiring our field labor to continue to execute at a very high level, and I think we're going to carry that strength into 2019. But stay tuned for more on that, when we get there on the timeline.

Anthony J. Guzzi -- Chairman, President and Chief Executive Officer

Yes, and as far the transportation projects, I think when you look at it as a portfolio over the last three years, we've actually done quite well, absent the one project in New York City, which had a lot of anomalies with it. This was more of a routine run of mill issue. The scope got away from us. We have a lot of other things where the scope moves with us. We feel really good about the transportation market, and it's one of the things we can really add value long-term.

Tahira Afzal -- KeyBanc Capital Markets -- Analyst

Got it, OK. Tony, actually that's pretty helpful. Thank you both.

Operator

At this time your next question comes from Adam Thalhimer. He is from Thompson Davis. Adam, your line is open at this time.

Anthony J. Guzzi -- Chairman, President and Chief Executive Officer

Adam, how are you?

Adam Thalhimer -- Thompson Davis -- Analyst

Hey, good morning, guys, nice quarter.

Anthony J. Guzzi -- Chairman, President and Chief Executive Officer

Thank you.

Adam Thalhimer -- Thompson Davis -- Analyst

Tony, are you seeing much variability in demand by city or region at this point?

Anthony J. Guzzi -- Chairman, President and Chief Executive Officer

Sure. I mean there's parts with our companies, right, we have companies that are more capable in certain markets. And so therefore they're able to do more things. So I can't tell you whether it's demand, but yes, I mean there are some pockets around the country that are stronger and some of that had to do with us, right? I would say, broad-based there is a general uplift. There is markets we don't participate in a large way. So I don't have a view on those. But both coasts are pretty good. I do think the residential high rise market is slowing in some cities, not a big part of what we did, and quite frankly that could be good, because it could allow more manpower to come to our projects and allow us to grab some manpower and move out our marginal manpower.

But right now, the market's pretty strong and with the return of the upstream market in the Permian, the return of the downstream market in the Gulf Coast, we're all figuring out how to deal with SB-54 in California, and the resuming normal activity downstream there in California. I think if you look at that in general, there is a demand for our labor, there is demand for manpower. I think long term, we continue to see really good bidding opportunities for the companies that we have that have the most capability.

Adam Thalhimer -- Thompson Davis -- Analyst

Okay. And then, Tony, can you remind us what margins within Industrial are you happy with? You said you're a little unhappy with the margins.

Anthony J. Guzzi -- Chairman, President and Chief Executive Officer

I mean I think depending on mix and end mark, we have a view too. I mean I think that if we are heavily mixed toward the field in a different -- in a quarter, it may go more toward the mid-6s to high-6s. If we have a little more shop work it may get in the mid-7s. Mark,

Mark A. Pompa -- Executive Vice President and Chief Financial Officer

Yes, I would say, Adam, 6.5% to 8% would be what I would consider acceptable performance range and that could vary quarter-to-quarter depending on what -- where you are relative to turnaround range.

Adam Thalhimer -- Thompson Davis -- Analyst

And more stock at operating income margins?

Mark A. Pompa -- Executive Vice President and Chief Financial Officer

Yes.

Adam Thalhimer -- Thompson Davis -- Analyst

All right.

Anthony J. Guzzi -- Chairman, President and Chief Executive Officer

I mean, realize that's our segment with the heaviest DNA load.

Adam Thalhimer -- Thompson Davis -- Analyst

Okay. And then in electrical, you referenced some large jobs that we're starting up, can you give some additional color on kind of magnitude and timing of how that passes [ph)?

Anthony J. Guzzi -- Chairman, President and Chief Executive Officer

Yes, they are large. No, we don't give specifics, but these are jobs, mid-$40 million, mid-$50 million type jobs or more starting up. They are commercial, they are industrial and yeah, they will have a latitude of somewhere between 9 months and 18 months, we think right now.

Adam Thalhimer -- Thompson Davis -- Analyst

Okay. And then lastly from me, Mark, can you give us any color on cash flow expectations for Q4?

Mark A. Pompa -- Executive Vice President and Chief Financial Officer

Yes. I mean, I think both Tony and I mentioned in our commentary that we're expecting Q4 to be stronger than I think Q3. So realistically, it's going to be something north of $100 million in the fourth quarter, and we'll see where we are. I mean if we continue to have the same level of strong organic revenue growth in the fourth quarter, my estimate, might be a little bit on the high side but that'll be a good position to be in, right? Because we're going to just carry over that monetization of activity into 2019.

We have a lot of T&M work in progress right now, obviously with our field-based businesses, both within the Industrial segment and within our electrical construction segment. And unfortunately the way those contracts are structured we bill in arrears and we got a lot of craft mobilized on a daily basis, I mean we're billing when we're supposed to, that money may not come until quarter one, 2019.

Adam Thalhimer -- Thompson Davis -- Analyst

Our days are still pretty good.

Mark A. Pompa -- Executive Vice President and Chief Financial Officer

Yes.

Adam Thalhimer -- Thompson Davis -- Analyst

And our net billings are in good shape (multiple speakers)

Mark A. Pompa -- Executive Vice President and Chief Financial Officer

And our IRAs again at 9/30 looks no different than that it is as of December 31th, 2017 or as of 9/30 of 2017. So --

Adam Thalhimer -- Thompson Davis -- Analyst

So I mean the good news is we always say, we like to invest in our business for growth. We're investing in our business for organic growth right now, and when we have the ability to take advantage of investing in our business for acquisition growth too.

Great, thanks guys.

Mark A. Pompa -- Executive Vice President and Chief Financial Officer

Thank you. You're welcome.

Operator

At this time, your next question comes from Noelle Dilts from Stifel. Noelle, your line is open.

Noelle Dilts -- Stifel Nicolaus -- Analyst

Hi, and congratulations on a good quarter. I just wanted -- Tony, you mentioned labor a bit in your comments and I just wanted to dig into that a little bit further. First, I think the question is, are the labor markets becoming so tight that they could potentially constrain growth. I know you mentioned some productivity initiatives. So if you could kind of expand upon what you're doing there. And then can you give us a sense of what you're seeing in terms of wage rate changes and how to think about the productivity of your workforce right now as you as you bring on new people?

Anthony J. Guzzi -- Chairman, President and Chief Executive Officer

Right. I mean clearly right, we're beyond our core workforce right now and have been for the last 24 months. And of course as we grow, more people get added to our core workforce. And I think you have to take a nuanced view of this, no other way we think about it. The business is the peak, the fastest, which would be our industrial turnaround businesses and oil and gas businesses. Fine, short term labor constraints are the most challenging. And what that would likely lead to is an extension of time on a given turnaround or an extension of hours to someone will work to get the work done.

And there's a lot of things driving that. One is a resumption of demand, and it's coming now after a slow period. So some people have left and gone to the construction trades out of that core work group. The other part of it is, that demand can be pretty broad based. So you are strong in Texas or Louisiana right now, and work's returning in California where the wages are a little higher, you may find it more difficult to staff a turnaround in Ohio or in Indiana.

So you have to really think about it in a nuanced way. And then when you go to the construction trades where your planning can be a lot more systematic, you start thinking about what the mix of overtime and other levers you will use and you have thought about that in your estimate. And you are used to drive performance on that, so that you can keep your most productive labor working as much as you can, but also at the same time realizing you can't fatigue the workforce to the point where they're no longer productive. And so a lot of planning goes into that.

And then the thing -- worst thing going on in general is, you're seeing an upskilling. I would not be running today a painting company, a drywall company, a janitorial company in any significant way because the most skilled of those people are trying to make their way up into the better trades and of course we're a landing home for that. So there's a lot of different -- and of course when you get to, each of these are a localized market to some extent and so you have to work through that. The good news is, when you get to what the broader category of skilled trades cares about, we're one of the destinations of choice. And the reason we are is because of four or five things that are most important starting with, I know for a fact, I'm going to get paid every week. I know that I'm going to be working for supervision that knows what they're going to do, and knows what they're doing.

I am working in a place that invests in safety, in my safety, in my training and my equipment. And if I do a good job, I'm likely to be able to become part of their core workforce. And we check all those blocks. And it really -- you have to think about those things from both a union and nonunion standpoint, and it's very much in the local market. And then you get to wages. Union wages goes lower in this environment because they were higher to begin with, than nonunion wages. And the union wages are contractually, there are hundreds of local negotiations that happened to set those contracts. There are local CBAs and we negotiate and because we're one of the leaders in the most important markets, we have found the unions to be very rational, in most markets, not all, but most markets because they realize it's about(ph). And part of it is they know the hours can go up and their members can benefit from over time and other special things that happen in a more mission-critical job. In the non-union world, yeah, for the most skilled labors, wages my accelerate a little faster, but there you allow -- you have much more flexibility on crew mix and so we have to get very good about that.

And then you get to the productivity initiatives, and you know we have some of the best foreman and superintendents in the businesses and estimators and project managers and we think a lot about pre-fabrication right now. And in a good market is where you learn to do prefab the best because you're straining at labor and you want to keep your best labor productive. So we've invested in pre-fabrication application and buy the investment in pre-fabrication over the last, really 10 years in things like the Trimble systems to make sure the point are right and then and all the things we do we are in as good a position as anybody to take labor out of the field and put it into our shop.

Noelle Dilts -- Stifel Nicolaus -- Analyst

Thanks, that's great color. For my second question I wanted to stick into refinery services a bit more. As you think about this kind of catch-up from the delays associated with Harvey and I understand you're limited in what you can say about '19, but is there a way you could give us a sense of how you're thinking about sort of just base growth in that market. And then how much this kind of potential catch up or deferral of work that could add to the opportunity. As we look out over the next 12 months to 18 months.

Anthony J. Guzzi -- Chairman, President and Chief Executive Officer

Yeah. A lot of deferral work, you have to be careful how you think about it, because the way, you'll see that is in scope increase once you're into the turnaround. I mean so we probably will have a lot of visibility on deferrals. And so we're into it. As one of our most seasoned operators thoughtfully told me last year when I was thinking about all that and asking somebody that's actually on the front lines of it every day. He said, Tony, so when you miss a oil change in your car, do you then decide to do two back-to-back. Of course the answer to that's no. In any case by missing the oil change you create damage can the answer that maybe. And so, we'll learn a lot about that in the fourth quarter and the first quarter as we get into these turnarounds and see what happens with scope.

All that being said, you know, one of the things that -- there's a lot of things going on in that market right now. And one of the things you see on the negative side, you can see all this consolidations happen. As a large contractor that could be a positive for us, because we have the ability to serve those large refiners in a substantial way.

And then on the other side, you could say the crude mix is different than what these folks had planned eight years to ten years ago when there was a big CapEx cycle to get these refineries, especially on the Gulf Coast, and some of the Midwest ones prepared for either sour Canadian or North Dakota crude or Venezuelan crude and Canadian crude, when you looked at the Gulf Coast. And now they're running more Permian crudes what is a sweet crude. As you put all that together and say, what does that mean for maintenance. And so the consolidation's been good, scope increases could happen from the deferrals, but then the life maybe extended in some of these assets because of the crude mix going through.

We think net-net, net of all that we're in a pretty good position and we have to continue to look for services to add and we are doing that. And by adding those services we can keep ourselves more relevant to our customers.

Noelle Dilts -- Stifel Nicolaus -- Analyst

Thank you. Very helpful.

Operator

At this time your next question comes from Brent Thielman from D.A. Davidson.

Brent Thielman -- D.A. Davidson -- Analyst

Great, thanks. Great quarter.

Anthony J. Guzzi -- Chairman, President and Chief Executive Officer

Thank you.

Brent Thielman -- D.A. Davidson -- Analyst

Tony, in industrial services, we've all been waiting for the lift for some time. And it sort of feels like you're seeing kind of an abrupt comeback in the business. You mentioned what you've done to hire and retain people and things were slower. Is any of or all of that playing into more favorable contract terms with these customers right now? Is there -- that might be scrambling to get your services?

Anthony J. Guzzi -- Chairman, President and Chief Executive Officer

No. These are very tough negotiators. You deal with the supply management and purchasing group now. You deal with the operational scope, and you have to be pretty thoughtful on how you do contracts with them. But what is happening is people realize to get the right mix of work on it, that they have to get down to and understand who's going to be coming on the job. So you're seeing a return to that.

But these are tough negotiators that know what they're doing. And the good news is, they value what we do and we have large scale relationships with some of the biggest downstream chemical and petrochemical refining companies.

Brent Thielman -- D.A. Davidson -- Analyst

Okay. And you offered some good things in terms of the different factors playing into -- kind of what's in back into these refining customers in the Gulf and so forth. I didn't hear, you mentioned IMO 2020. Could you talk about what that might mean for your business over the next few years?

Anthony J. Guzzi -- Chairman, President and Chief Executive Officer

Sure. MARPOL is a good thing for us. It's going to lead to a lot of small capital projects, which we happen to do on the mechanical side. It's going to lead to increase in diesel type production or right below diesel, which is something that U.S. refiners are structurally advantaged at, which should increase demand. The better our customers do, the better we do. And it should lead to a higher utilization long-term.

I don't know what's going to happen to the refining sector 30 years from now, but here's how we think about the next five to 10 years. We see steady demand we think, improvement and a MARPOL is helping that. And the other thing we see is the Gulf Coast refiners especially really becoming more and more strategically advantaged, one because of their size, two, because of the mixture of crews they can put in, their input costs, especially natural gas are very favorable. And who's likely to be the losers and we have an export market we can now serve. Who's likely to be the losers long-term in the refining space? It is Northern Europe and the East Coast of the US

Brent Thielman -- D.A. Davidson -- Analyst

Okay. And I guess as we are trying to think about next year, assuming it looks like this construction market momentum is going to carry on. Would there be any reasons why electrical or mechanical at least on a core organic basis should grow a lot faster than the other?

Anthony J. Guzzi -- Chairman, President and Chief Executive Officer

I think it's been a project mix and timing. No reason, I think structurally, no, especially with industrial continuing to plod back to a reasonable volume levels. No.

Brent Thielman -- D.A. Davidson -- Analyst

Okay. Thanks for taking my questions.

Anthony J. Guzzi -- Chairman, President and Chief Executive Officer

Thank you.

Operator

At this time your next question comes from Adam Thalhimer from Thompson Davis.

Anthony J. Guzzi -- Chairman, President and Chief Executive Officer

Adam, a double-header.

Adam Thalhimer -- Thompson Davis -- Analyst

I am back. Yeah. Can you just provide some brief comments on the buyback, the $200 million?

Anthony J. Guzzi -- Chairman, President and Chief Executive Officer

Yes. I mean, look, it's a sign of confidence, right? We've had a thoughtful buyback program over a period of time. The way we think about is a return the cash to shareholders. We're not speculators in our own stock. We've executed well over a long period of doing it. We have no specific goals in any given quarter or any given time. One thing we are committed to long-term is to keep no dilution from happening, which is not that hard considering we only dilute somewhere between, what, Mark, 250,000 shares a year. Not a lot.

And so look, obviously our Board said, we had 79 million remaining, we're going to do another $200 million. I would guess, we think our stocks obviously of value right now over the last couple of weeks, sort of it's been a crazy correction, but the whole market has to. But again go back to my earlier point. We're not speculators in the stock.

We balance it against other opportunities for organic growth, acquisitions. We prioritize share repurchase over expanding the dividend.

Adam Thalhimer -- Thompson Davis -- Analyst

Perfect, OK, thanks.

Anthony J. Guzzi -- Chairman, President and Chief Executive Officer

Yeah, is that it, Maisha?

Operator

(Operator Instructions).

Anthony J. Guzzi -- Chairman, President and Chief Executive Officer

Okay, I think that's it.

Operator

At this time we do have -- I apologize, I don't mean to interrupt. However we do have a question from Noelle Dilts from Stifel.

Anthony J. Guzzi -- Chairman, President and Chief Executive Officer

Go ahead, Noelle.

Noelle Dilts -- Stifel Nicolaus -- Analyst

Along the capital allocation line of questioning, could you just give us an update on kind of what you're seeing in terms of potential M&A targets in the market, and any changes in how you're thinking about multiples and valuation?

Anthony J. Guzzi -- Chairman, President and Chief Executive Officer

We really haven't changed how we think about it for a long period of time. I mean, these two deals we executed so far this year I think are emblematic in the kind of things what we do. There may be one a little bit larger or two a little bit larger over the next couple of years. But nothing that we see right now, that -- I don't think we're going to be making a transformative deal anytime soon. That typically doesn't work out well in our space.

We're not going to go out and spend a couple of billion dollars on something. We're very comfortable doing acquisitions, $200 million to $600 million. There's really nothing out there like that right now. But a collection of them together will start to look like one of those. Valuations for anything more than $25 million of EBITDA is still crazy. I mean, there's been no cooling of that with interest rates going up a little bit for the private equity people. I think that's more of a terms game than it is a interest rate game.

If banks will give them great terms then they'll execute the deals. We'll feel good about what we're doing. We have a good pipeline of the kind of deals that could really add value. And we'll continue to balance that against our organic growth and return of cash to shareholders.

Noelle Dilts -- Stifel Nicolaus -- Analyst

Thanks.

Anthony J. Guzzi -- Chairman, President and Chief Executive Officer

Thank you.

Operator

And at this time if that is all the questions, that will our last question at this time.

Anthony J. Guzzi -- Chairman, President and Chief Executive Officer

Okay. Thank you to everybody, and we look forward to talking to you collectively, I guess, again, in February. And everybody have a happy end of the year and everybody stay safe. Good bye.

Operator

This concludes today's conference call. You may now disconnect. Thank you for joining.

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